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Fed Move Could Give Oil A Volatile Trading Day

Tuesday, 18 Mar 2008 | 12:40 PM ET
CNBC.com

Black gold and gold futures are significantly higher after yesterday's rout. Here's what the energy market seems to think will happen:

The Fed will cut rates by 75 basis points (maybe even 100, a few think it could be 50). If the cut is as massive as some suspect, the dollar will weaken even further against the Euro and other currencies. Investors will pour more money into oil and run for cover and hedge against inflation by buying gold.

Gold has paired some of its gains, but remains above yesterday's record $1,000 close. NYMEX May crude futures are up over $2 to over $106--that's the contract with the most liquidity since April crude futures expire tomorrow.

So was yesterday just an aberration?

Oil posted its biggest percent drop since April and sliding the most in dollar terms since 1991. RBOB futures plummeted more than 6 percent, sending the April gasoline crack into negative territory for the first time since February 2006. Today the gasoline crack has rallied about $2

As the summer driving season draws near, buyers have come back and that's good for the refineries, says gasoline trader Anthony Grisanti of GRZ Energy. Buying in the April RBOB has strengthened the crack spread. "A negative crack would mean they'd produce no gasoline," Grisanti says. "And we're in the middle of gasoline season. They need to produce."

Yesterday it seemed to me the bears were saying: "See, I told you the fundamentals didn't support prices at these levels. Gasoline supplies at their highest level in 15 years, crude inventories building for the last few weeks. Enough!"

Today, it looks like the bulls refuse to be stopped.

Perhaps the anticipated Fed rate cut is being viewed as a last-minute attempt to push prices higher. Yet, it's not only the front of the curve that's gaining ground. Though Dow Jones latest analyst survey sees oil prices averaging $88.80/barrel this year (a $3 increase for last month's forecast), prices are already at $96.70 on average for 2008--and across the curve prices are well-bid over $99 for the rest of the year!

Whether oil holds onto it gains or slumps once again will depend mostly on what the Fed does at 2:15 p.m. With the front-month crude futures contract expiring tomorrow AND the Fed decision later this afternoon, expect a volatile, final 15 minutes of regular trading session.

Questions? Comments? energysource@cnbc.com